Company’s investment in a new tissue machine at Calhoun, Tennessee, mill could be a big step toward commoditization of the North American premium tissue market
MATT ELHARDT, FISHER INTERNATIONAL
Recently, Resolute Forest Products, Montréal, Quebec, Canada, announced the investment of $270 million for a new tissue machine and converting facilities at its Calhoun, Tennessee, USA, mill. While new capacity in tissue is not unexpected (the grade essentially grows with population in developed economies), Resolute’s announcement could be viewed as a significant step toward the potential (some may say, eventual) commoditization of the North American premium tissue market.
We’ll examine two drivers of this trend:
• Advanced tissue making technologies are now available to new players (including low-cost integrated mills)
• Private labels continue to grow their share of the market.
ADVANCED TISSUE MANUFACTURING NO
LONGER A BARRIER TO ENTRY?
Tissue machine technology can be grouped into two general categories — advanced and conventional. Advanced technologies (TAD, UCTAD, ATMOS, NTT, etc.) use a structured forming process that results in a bulkier sheet at the reel versus conventional wet-pressing (CWP) methods. Generally, this results in higher product performance characteristics at a lower fiber cost.
Conventional machines can make up this shortfall at the converting stage, for example, by adding plies and embossing to reach the desired performance levels. However, they must do so at higher fiber and converting cost, which normally exceeds the higher energy requirements of using advanced technologies. This concept is illustrated in Figure 1.
Using additional fiber to meet customer requirements is a workable strategy so long as a mill has access to low-cost fiber. In North America, fiber costs for T&T mills can vary widely, as show in the cost benchmarking chart from FisherSolve™ (Figure 2). In the chart, a clear difference in fiber costs can be seen in those mills that purchase market pulp (the red bars), and those that predominantly use recycled fiber or pulp manufactured on site (the green bars).
But remember, advanced machine technology can offset the fiber advantage as desirable product characteristics are met with less fiber weight for the same case of product. In Figure 3, the Stat Case cost curve from FisherSolve — with the vertical axis representing tissue and towel case costs NOT per ton costs — demonstrates this point.
(See sidebar for a review of statistical case benchmarking.) Advanced technology machines that are purchasing pulp (circled in Figure 3) can be competitive on the cost curve as compared with integrated conventional machines.
Note something about this analysis — the lowest cost advanced technology machines are those at integrated mill sites. This analysis becomes even clearer if we look only at stat case costs for consumer bath tissue in North America (Figure 4). It is clear that the lowest cost of production for advanced technologies is at integrated mills, with a cost advantage of about $5 per case.
Costs might not be all that matter, you say — after all, consumers have their brand preferences. The industry has thrived under a “house of brands” strategy, whereby major producers are able to meet consumer segment needs with varying products. Marketing messaging is then used to reinforce each product’s positioning (e.g., “value” for economy tissue and “extra soft” for ultra-premium) with prices that are typically higher for the highest quality brands (Figure 5).
But what happens if everybody is able to get a good product at a lower price?
ENTER PRIVATE LABEL
Private label (think Costco or Wal-Mart) brands had 18 percent of the North American tissue and towel (T&T) market in 2003. Now, more than 10 years later, that number is closer to 28 percent. Today, toilet paper is reported as Costco’s top selling product1, and its Kirkland private label brand surely has a significant, if not majority, share of those sales. Will private label continue to grow?
Why shouldn’t it? As long as customers can get the product characteristics they want at lower prices, they ought to switch. Consider that the switching has apparently occurred with very little marketing dollars to overcome the brand equity of incumbents. (When was the last time you saw a commercial on television for Kirkland brand tissue?) One could even argue that penetration has been slowed by the limited availability of low-cost, integrated mills with advanced technologies.
However, new T&T machines are increasingly of the advanced-technology category (as shown in Figure 6), in part because of expiration of patents and the development of new processes that are being marketed to every tissue company by the major machine builders. After all, use of private label brands has long been a standard in Europe, where they have greater than 60 percent share of the marketplace.
As advanced T&T manufacturing technologies become the norm, and as the decline of printing and writing (P&W) paper grades frees up more low-cost pulping capacity, will Resolute’s announcement become the “new normal” in tissue? If it does, branded T&T products are apt to see more pressure in the years to come. Compounding this threat, research by Mintel2 suggests that millennials (the generation of young, working adults, some 90 million strong in the U.S.) show the least loyalty to branded tissue products. The future reality of higher-quality and even lower cost tissue is sure to raise the stakes for branded producers of T&T in North America.
Matt Elhardt is VP Business Development, Fisher International, Norwalk, Conn., USA. Contact Matt at firstname.lastname@example.org or 203-854-5390.
State Case Cost Benchmarking
Stat case costs are modeled in FisherSolveTM. This new functionality lets you perform T&T cost benchmarking analysis by equipment type (advanced versus conventional technology).
Using stat case for benchmarking creates true parity for mill- and machine-manufacturing costs, resulting in more reliable cost curves and more meaningful comparisons.
FisherSolve is unique in its ability to perform this analysis because its equipment, production, and cost data are integrated.